OECD corporate tax proposals fall flat

Tax avoidance is a challenge to nation states as it erodes their tax base and no state can function or command citizen support without adequate revenues. EU member states are thought to be losing about one trillion euros of tax revenues each year due to a combination of tax avoidance, evasion and arrears.

In 2013, the G20 nations asked the Organisation for Economic Cooperation and Development (OECD) to investigate Base Erosion and Profit Shifting (BEPS) and develop proposals so that corporate “profits should be taxed where economic activities deriving the profits are performed and where value is created”.

The OECD has now published a series of reports, but has arguably failed to meet its brief.

The reasons are that the OECD is not an appropriate body for developing tax reforms. It has shunned transparency and failed to address the major fault lines of the current corporate tax system.

The issue of global tax reform should be handled by the United Nations rather than the OECD. It is too close to corporate interests. The OECD primarily represents western interests and has little direct representation from the BRICS (Brazil, Russia, India, China, and South Africa) economies and low-income nations. The OECD proposals do not empower low-income countries.

The above can be illustrated by examining the OECD recommendations on country-by-country-reporting (CBCR). The concept of CBCR requires multinational corporations to publish a table showing their sales, profits, assets for each country of their operations. So if a company revealed relatively few staff in a country but a massive amount of profits, then one would suspect that profits have been artificially booked in those locations.

The OECD supports the concept of CBCR, but recommends that each multinational corporation should only release the information to its home country tax authority. It expects countries to enter into a series of treaties to secure the information from the home country of the corporation. There is no guarantee that this information would be shared on a timely basis and poorer countries would not necessarily be able to finance the structures to secure the information.

The most efficient solution would be for CBCR to be publicly available. For example, by including it in annual company accounts, but the OECD does not support such transparency.

The OECD recognises that the current corporate tax system is broken, but its preference is to patch-up the current one. Subsidiaries within the same group of companies pay royalty, management fees and interest on loans to each other. The aim is to reduce taxable profit in one country and shift it to a low/no tax jurisdiction. The OECD recommends that the tax relief on intragroup interest payments be restricted.

For the rest, the OECD’s general response is to ask for improved documentation to support the transfer prices used by companies.

This does not address the problems.

The current corporate tax system was designed in early twentieth-century. At that time large parts of the globe were under colonial rule and corporations were required to pay taxes in country of their residence rather than the place of their business activity. So a company registered in London paid corporate taxes in the UK even though its entire labour force, assets, and sales were in India.

Such rules are now problematical because companies can incorporate in tax havens and avoid taxes in the UK and elsewhere. The OECD does not adequately tackle this concept.

The modern multinational corporation is an integrated entity. This enables companies like Google to coordinate the activities of its subsidiaries in the UK, the Bahamas, and Ireland and elsewhere to produce profit. These subsidiaries are under common control, but for tax purposes are assumed to be separate taxable entities.

This fiction enables companies to play profit shifting games and arbitrage the international tax system. The OECD does not challenge the fiction of independent entities

The current tax system allocates corporate profits to each country by using transfer prices. This assumes that independent or arm’s length prices of all intragroup inputs and outputs are available.

However, this is difficult because global markets are dominated by relatively few corporations. For example, 80 per cent of the entire production of world grain was distributed by just two companies (Cargill and Archer Daniel Midland) and just 20 companies control the coffee trade. The OECD clings to the fiction of arm’s length prices.

The OECD could have explored alternatives which go under the title of unitary taxation. A key idea here is to treat a group of companies as a single unified economic entity. It ignores most intragroup transactions and thus curbs profit shifting. Profits of a company are allocated to each country on the basis of real economic activity, such as the location of assets, employees, sales, etc. The profits can then be taxed by each country in accordance with its laws.

A version of this is operated by the US and Canada for domestic tax calculations. A version known as the Common Consolidated Corporate Tax Base (CCCTB) is also advocated by the EU. The OECD has totally ignored such developments.

Prem Sikka is professor of accounting at the University of Essex

7 Responses to “OECD corporate tax proposals fall flat”

James_2014

Surely the next port of call is the EU ?- if a multinational wants to use the benefits of this large trading bloc – then the EU could gold plate the treaty obligation to require wider reporting than OECD levels require.

it would be great if the UN could have delivered public CBC reporting, but I don’t see any reason to believe it could have. Why would those who blocked it and got the OECD to water it down change their tune under the UN? The UN cannot force countries to agree to things.

Roy

Macrocompassion

Global Tax is a matter of taking from one organization for use by another less closely related one. This is akin to robbery, since the host country has done nothing to deserve its windfall! However there is one aspect of the tax situation which does make sense, locally or on a global basis. I therefore add the following message which was previously sent to a tax-justice betterment group:

Having studied your website and its various proposal
I wish to comment and remark that the big problem with taxation is to
place it on a socially just base. Since many different companies employ
their workers in different ways and pay them differently too, and since
these companies may be registered in many different countries in various
categories, the whole business of determining what makes up a criterion
for fixing a truly just tax becomes impossible when one tries to do it
on a basis of human activity. So why try, when there is a far better
means available which is really a true and socially just method?

According
to Adam Smith, land is one of the 3 factors of production and the
usefulness of land is seen in the price that intending tenants are
willing to pay as rent, in order to have access to the particular site
in question. Land is often thought of as being a form of capital since
it is traded in the same way as other durable capital items, however it
is actually not something which was man-made and thus rightly does not
fall under the category of being capital goods. The land was originally a
gift of nature for which all men (and women) should be free to share.
However, its value grows and it greatly depends on its location, which
is usually dependent on the numbers and density of the communities in
that region plus any natural resources such as minerals, animals or
plants of specific use or beauty. Consequently, most of the land value
is created by man and therefore its advantage should logically and
ethically be returned to the community for public use.

However
due to our existing laws, land can be owned and its value traded, even
though you can’t remove it to another place. This right of ownership
gives the landlord a big advantage over the rest of the community
because he determines how it may be used or if it is to be held out of
use, until the city grows and it becomes more valuable. Thus speculation
in land values is encouraged by the law in treating land an item of
capital goods, even though it is not.

Regarding
taxation and local community spending, the local taxes we pay are
partly used for improving the infrastructure, so the landlord benefits
from our present tax regime. Further he is able to benefit more when
unused land becomes fit for a community-chosen development region, with
all the associated corruption of how this news is leaked to a would be
speculator in this natural resource. However if land values were taxed
instead of the production based activities of workers, shoppers,
companies, foreign investors, etc., (with all of the associated
complications, loop-holes and regulations) there would be many
advantages and the only ones to be at a loss due to this would be those
who have been exploiting the growing values of land over the past many
years, when mere land ownership confers a financial benefit without the
owner doing a scrap of work! So it seems to me that for a truly socially
just form of taxation to apply there can only be one method–Land-Value
Taxation. Let us look again at the general situation.

When a new
area of land is being developed or a settler comes to a virgin site
that looks likely for his future settlement, the land is his first
consideration and he chooses the place having the most useful natural
resources. As more settlers arrive they tend to spread around this
location because of the greater availability of man-power when they have
difficult jobs that involve coordination and also for social community
reasons. They also are able to begin to specialize and this means that
the efficiency in making useful specific produce grows. However, the
land being occupied on the boarders of the settlement is less useful and
consequently a range of land values develops with the original settler
(now holding the village center) having the greatest site value.
Marginal land on the edge has almost no value due to the comparatively
high cost for bringing its produce to the central market. We should note
that this distribution in land values is created by the community and
not by the natural resources. As the city expands certain speculators in
land values will deliberately hold useful sites out of use, until
planning and development have cause their values to grow and there is
fierce competition for access to the best sites for both housing and
agriculture. This unavailability of useful land means that produce
becomes more costly to make and demand for it is reduced due to less
householders being able to afford these goods and also due to
unemployment causing wages to be lowered by the monopolists, whose land
has already been obtained when it was cheep. This basic structure of the
macroeconomics system limits opportunity and creates poverty.

The
most basic cause of our continuing poverty is the lack of properly paid
work and the reason for this is the lack of opportunity of access to
the land on which work must be done. The useful land is monopolized by a
landlord who either holds it out of use (for purposes in speculation in
its rising value), or charges the tenant too much for it. In the case
when the landlord is also the producer, he/she has a monopolistic
control of the produce and charges more for it than what an entrepreneur
having greater opportunity normally would.

A
wise and sensible government (of which very few exist), would recognize
that this problem is of lack of opportunity to work and earn. It can be
solved by the use of a tax system which encourages the proper use of
land and which stops penalizing everything and everybody else. Such a
tax system was proposed 135 years ago by Henry George, a (North)
American economist, but somehow macro-economists seems never to have
heard of him, in common with a whole lot of other experts. (I would
guess that they don’t want to know, which is worse!) George proposed the
single tax on land values without any other kind of tax on produce,
service or wealth item being taken at all!

The
land value tax has 15 features which benefit everyone in the economy
(except for landlords and banks), those who do nothing and expect that
their land dominance will be its own reward (and you believed that there
is no such thing as a free lunch!)

15 ASPECTS of LAND-VALUE TAXATION (LVT) affecting Government, Land Owners, Community and Ethics

3 aspects for GOVERNMENT:
1. LVT, adds to the national income.
2. The cost of collecting the LVT is much smaller than for income tax and
other production-related taxes.
3.
With LVT, the national economy stabilizes and no longer experiences the
18 year housing boom and bust cycle because speculation and
over-pricing of land ceases.

6 aspects affecting LAND OWNERS:
4. LVT is progressive, the owners of the most potentially productive sites pay the most tax.
5.
The land owner pays his LVT regardless of how the land is used. When
the land is leased to tenants most or all of the resulting ground-rent
is the tax.
6. LVT stops the speculation in land prices because any withholding of land from proper use is no longer worthwhile.
7.
The introduction of LVT initially reduces the sales price of sites,
even though their value (or potential usefulness) may continue to grow.
8.
With LVT, land owners are unable to pass the tax on to their tenant
renters, due to the reduced competition for access to the land now in
use.
9. With the introduction of LVT, land prices will initially
drop. Speculators in land values will tend to foreclose on their
mortgages and to withdraw their money for reinvestment. Therefore LVT
should be introduced gradually so that it allows investors sufficient
time to transfer money to company-shares where their greater use will
meet the increased demand for produce (see below).

3 aspects regarding our COMMUNITY:
10. With LVT, there is an incentive to use land for production, rather than it laying idle or being partly used.
11.
With LVT, greater working opportunities exist due to cheaper land and a
greater number of available sites. Consumer goods become cheaper
because entrepreneurs have less difficulty in starting-up and running
their businesses. Demand grows, unemployment decreases.
12.
As LVT is introduced, investment money is withdrawn from land and
placed in durable capital goods. This means more advances in technology
and cheaper goods.

3 aspects about ETHICS
13.
The collection of taxes directly from productive effort and commerce is
socially unjust. LVT replaces this form of extortion by gathering the
surplus rental income, which comes without exertion on the part of the
land owner. Consequently LVT is a natural system of money-gathering.
14.
Bribery and corruption cease with LVT. Before, this was due to the
leaking of news of municipal plans for housing and industrial
development.
15. The
improved use of the land will reduce the damage being done to the
environment due to the sites being held unused being dumping grounds as
well as the greater distances needing to be traveled between home and
workplace requiring more transportation services and the associated
emissions due to unnecessarily fossil fuel use.

TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!

Prem Sikka

CBCR is supported by most low-income countries and they would be able to speak at the UN. The same are not members of the OECD. The UN deliberations can become part of international law. OECD’s deliberations can’t. Of course, in the face of corporate lobbying nothing is easy.